WEAKNESSES

Risk assessment

Growth will remain fragile

Lebanese growth is expected to pick up slightly, after a slowdown in 2018, due notably to a loss of confidence among foreign investors and Lebanese households alike owing to political uncertainty. Although weak, the improved growth prospects for 2019 are based on the resilience of tourism and the banking sector. Despite cooler credit growth, the banking system – the backbone of the Lebanese economy – will remain robust, particularly thanks to large remittances from the diaspora. The easing of the Syrian conflict could also benefit Lebanese exports. The gas sector is poised to receive investments and should contribute to growth. The Lebanese government has signed two offshore gas exploration and production agreements with an international consortium led by Total, and exploration is scheduled to begin in 2019. However, the political situation could still be a drag on growth in 2019, by hampering private consumption. The financial assistance promised by international donors, which is expected to be committed particularly to infrastructure projects, is being disbursed slowly due to the unstable political context. This situation could affect the already low level of public investment (1.4% of GDP in 2017).

After rising in 2018 following various tax hikes, inflation will slow in 2019. The return home of many Syrian refugees will ease the upward pressure on property prices, while the expected stability of oil prices will moderate imported inflation.

Substantial debt and twin deficits

After increasing in 2018, budgetary revenues, mainly from taxes (16% of GDP in 2017), are expected to stabilise in 2019. At the same time, expenditure is expected to tick up due to growth in the public sector wage bill and payment of debt interest. The latter, which accounted for nearly 10% of GDP and one-third of expenditure in 2017, will continue to have a significant impact on public finances. With a primary balance in equilibrium, it is this interest that will once again lead to a substantial government deficit. Subsidies paid to Electricity of Lebanon, a power utility company (9% of total expenditure in 2017), will continue to be a major expenditure item for the state. Public debt, mainly domestic, is expected to exceed 150% of GDP in 2019, making Lebanon the third most indebted country in the world, after Japan and Greece.

Regarding the external accounts, the current account deficit is not expected to change. Despite an increase in exports, including motor vehicles (18% of exports) and gold (13%), the goods deficit will widen. This is because imports are also set to increase amid sustained prices for oil (nearly 20% of imports), and will remain much higher than exports. At the same time, the services balance will see its surplus increase, mainly due to tourism. Remittances from expatriates (6% of GDP in 2017) will continue to reduce the current account deficit, which will be financed by inward foreign investment (21% of GDP in 2017), mainly composed of portfolio investments, as well as by foreign exchange reserves. The latter, which were equivalent to 14 months of imports in 2017, are therefore expected to shrink. Higher interest rates will put additional pressure on the reserves – a problem which must be tackled, given that the Lebanese pound is pegged to US the dollar. Abandoning this regime would have a significant impact on the private sector, in a country where external debt – most of which is denominated in US dollars and 90% of which is private – stood at close to 200% of GDP in 2017.

Instability affects Lebanese political life

President Michel Aoun, a Christian and a former general, is currently dealing with major political instability, which intensified further after the parliamentary elections in May 2018. Prime Minister Saad Hariri, leader of the Sunni community, emerged weakened from the elections: his Future Movement Party lost nearly half of its seats, while the March 8 Alliance, formed around the Shia movement and President Aoun’s Free Patriotic Movement (Maronite), won a majority. The new distribution of seats in Parliament forced the prime minister to form a new government. However, this revived tensions between the political parties in a Lebanese political system where power is split along religious lines. A government proposal put forward on October 29, 2018 was rejected by Hezbollah, a Shia party, which called for greater representation of Sunnis who are not part of the Future Movement. Although a government is expected to be formed in 2019, the situation reflects a highly divided political landscape.

In addition to reinforcing sectarian and political divisions, the growing influence of Hezbollah, an Iranian-backed party that provides military assistance to the Syrian regime, is straining Lebanon's relations with its traditional allies. In 2018, the Gulf States and the United States stepped up sanctions against senior party officials. Hezbollah's electoral performance has also increased the tension with Israel.